Toll credit calculations based on expenditures prior to enactment of SAFETEA-LU (August 10, 2005), will follow our August 7, 1998 memorandum. Toll credit calculations based on expenditures on or after the date of enactment of SAFETEA-LU will be determined in accordance with this memorandum. The Maintenance of Effort (MOE) determination remains the same as pre- SAFETEA-LU.

Any State that has received approval for toll credits based on expenditures made on or after enactment of SAFETEA-LU using our August 7, 1998 memorandum, can recalculate their toll credits earned according to this memorandum.

Approval Authority for Toll Credits

As of the date of this memorandum, each State's Toll Credit Application and Maintenance of Effort (MOE) determination are to be approved by the FHWA Division Administrator (DA). Each DA will now be responsible for reviewing and approving toll credit applications received from the State. The DA will reply directly to the State concerning acceptance of its toll credit application. Additional information is provided below under "Request and Approval of Credit."

The Appalachian Development Highway System (ADHS) program under section 14501 of title 40 is now specifically prohibited from using toll credits toward the non-Federal share of an ADHS project. Prior to SAFETEA-LU, the only statutory exception to the use of toll credits was for the emergency relief program authorized by section 125 of title 23.

The toll credit amount earned from expenditures paid for with Federal funds (except for loans of Federal funds or other financial assistance that must be repaid to the Federal government) shall be reduced by a percentage equal to the percentage of the total cost of building, improving, or maintaining the facility that was derived from Federal funds.

Prior to SAFETEA-LU, a State's toll credit calculation could only be based on toll revenues expended on facilities that were built, improved, or maintained without the use of Federal funds. SAFETEA-LU eliminates that requirement.

The Maintenance of Effort (MOE) determination requirements were not revised by SAFETEA-LU. The information pertaining to the MOE determination is discussed below.

Our August 7, 1998 memorandum prohibited the use of toll credits to be applied retroactively. On February 11, 2005, our memorandum "Retroactive Use of Toll Credits" amended our August 7, 1998 memorandum by allowing toll credits to be applied at any time while the project is being advanced as follows:

Toll credits can now be applied at any time during the development and implementation of the project, including after execution of the initial project agreement. The project agreement or modification should indicate what the Federal share is and that toll credits are being used in lieu of all or part of the required State match, resulting in up to 100 percent Federal funds being used on the project.

Determination of Amount of Credit

The amount of credit earned is based on revenues generated by the toll authority (i.e., toll receipts, concession sales, right-of-way leases or interest), including borrowed funds (i.e., bonds or loans) supported by this revenue stream, that are used by the toll authority to build, improve or maintain highways, bridges or tunnels that serve interstate commerce. The following requirements apply:

The toll facility generating the revenue must be open to public travel.

The toll authority may be a public, quasi-public, or private entity. Although a public or private entity other than the State Transportation Department may have statutory authority to collect tolls in a particular state, the State Transportation Department may be the designated toll authority in some cases.

The amount of credit is based on expenditures (actual cash outlays) by a toll authority for capital improvements to build, improve, or maintain public highway facilities that carry vehicles involved in interstate commerce (the degree does not matter). It cannot include expenditures for items such as routine maintenance work (i.e., snow removal or mowing), debt service, or costs of collecting tolls. Eligible improvement activities may be carried out on facilities that have received Federal-aid funding in the past.

The calculation of the toll credit amount is based on the total cost of specific eligible improvement activities. Toll credits should be calculated as follows:

The toll credit amount earned from expenditures for eligible improvement activities paid for entirely without Federal funds will be equal to the amount of the eligible expenditures.

The toll credit amount earned from expenditures for improvements paid for with Federal funds (except Federal funds or financial assistance that must be repaid to the Federal government, such as that which may be provided under the TIFIA credit program) shall be reduced by the total percentage equal to the percentage of the total cost of building, improving, or maintaining the facility that was derived from Federal funds as shown in the following examples:

Example 1: Calculation of toll credits for expenditures on a $10 million Federal-aid project where the Federal share is 80% ($8 million) and the non-Federal share is 20% ($2 million). If toll revenues are used to finance all of the non-Federal portion of this project, then the actual toll credits earned will be computed by reducing the non-Federal share (i.e. toll revenue expenditure) by the percentage of Federal participation in the total project cost. In this scenario, the percentage of Federal participation in the total project cost is 80%. Therefore, the toll credit amount earned from this expenditure would be computed by reducing the $2 million toll revenue expenditure by 80% as shown:

$2 million - (0.8 x $2 million) = $400,000 toll credit amount.

Example 2: Using the same project in Example 1, toll revenues are only used to pay for $1 million of the $2 million non-Federal share of this project. The percentage of Federal participation in the total project cost is still 80%. Therefore, the toll credit amount earned from this expenditure would be computed by reducing the $1 million toll revenue expenditure by 80% as shown:

$1 million - (0.8 x $1 million) = $200,000 toll credit amount.

The State must calculate all previous toll revenue, expenditures, and toll credits based on the current present value.

Toll authority expenditures are based on when the actual expenditures are made regardless of when the toll authority revenue is generated. For example, if funds are raised through the issuing of bonds that will later be repaid from toll revenues, the actual expenditure of the funds raised from the bonds represents the amount used in the credit determination.

Expenditures for preliminary engineering or right-of-way acquisition for upcoming construction projects can be counted when calculating the credit amount.

Expenditures can include the initial construction of a toll authority's own facility provided these construction costs are to be repaid with toll revenues.

Expenditures can include revenues collected from a toll ferry provided the ferry serves as a link on a public highway.

Funding grants received by a toll authority from the State Transportation Department or State legislature are not considered to be revenues generated by the toll authority and expenditure of these grants cannot be included when calculating the credit amount.

The amount of the toll credit earned for a given Federal fiscal year (FFY) is based on the prior year's expenditures. For example, for a toll credit to be earned in FFY 2006, a State must determine if it had qualifying toll authority expenditures during the prior year, in this case FFY 2005. In determining the 12-month period to use for the prior year's expenditures, a State can use the 12-month period represented by the FFY or either the State or toll authority's fiscal year if the financial data is more readily available. In any case, whatever 12-month period is used in the first credit determination must continue to be used in later determinations.

For chartered multi-State toll entities, the amount of toll credit must be divided equally among all the charter States.

A credit for any given FFY can only be earned if a State satisfies the maintenance of effort determination, as described below, for that year.

Determination of Maintenance of Effort (MOE)

To be able to earn a toll credit, a State must satisfy the MOE determination required by 23 U.S.C. § 120(j)(2). The MOE determination is an assessment of a State's non-Federal transportation capital expenditures over a four-year period. The expenditures in the last year of the four-year period must exceed the annual average of the expenditures in the preceding three years of the four-year period.

A State may select one of three alternate four-year periods for the MOE determination as follows:

MOE Alternate 1 - This alternate uses the four years prior to the FFY for which a credit is being determined. For example, if a toll credit is to be earned for FFY 2006, a MOE Alternate 1 determination would compare FFY 2005 expenditures with the annual average expenditures for FFYs 2002, 2003 and 2004.

MOE Alternate 2 - This alternate uses the four-year period beginning three years prior to the FFY with the fourth year being the FFY itself. For example, if a toll credit is to be earned for FFY 2006, a MOE Alternate 2 determination would compare FFY 2006 expenditures with the annual average expenditures for FFYs 2003, 2004 and 2005.

MOE Alternate 3 - This alternate uses the four-year period beginning two years prior to the FFY and extending through the year after the FFY. For example, if a toll credit is to be earned for FFY 2006, a MOE Alternate 3 determination would compare FFY 2007 expenditures with the annual average expenditures for FFYs 2004, 2005 and 2006.

Both MOE Alternates 2 and 3 represent increased risk for a State since these alternates rely on current and future year non-Federal transportation capital expenditures that could be significantly affected by economic turndowns or political changes. Should a State not meet the future expenditure levels and, thus, fail to be able to certify that a specific MOE test has been met, any credit earned based on the MOE determination would be lost. This would require immediate replacement of Federal funds with State funds on projects where this credit has been used and could create a cash flow problem for a State.

MOE Alternates 2 and 3 can only be used beginning with credit determinations for FFY 1995 or subsequent FFYs. Once a State has selected the MOE alternate it wants to use, it must continue to use this same MOE alternate in all future MOE determinations.

Two-year rule - Beginning with the credit for FFY 1998 or subsequent years, this special rule can be applied when making calculations under any of the previous MOE alternates. Normally, the MOE determination is made by comparing the fourth year of a four-year period against the average of the three previous years. Under the special two-year rule, if any one of the three previous years exceeds the average of the other two years by 130 percent, then the higher year can be dropped from the three-year average computation and instead the average is based on only two years.

Using the normal process, 440 would be compared to the previous three-year average of (420+560+400)/3 or 460. In this case, 440 is less than the previous three-year average of 460 so the State fails to meet the MOE test.

Using the two-year rule, for the previous three years used in the average, one year, 560, exceeds the average of the other two, (420+400)/2= 410, by more than 130 percent (560 is greater than 410 x 1.3 or 533). As a result, the high year, 560, can be dropped from the average computation. In this case, 440 is then compared to the two-year average of 410 and the State meets the MOE test.

The two-year rule provides some flexibility to account for large spikes in expenditures. The two-year rule can be applied at any time for FFY 1998 or subsequent FFY credit determinations.

The following requirements also apply to the MOE determination:

The calculation of the non-Federal transportation capital expenditures must include expenditures to build, improve, or maintain (other than routine maintenance) public highways. As a minimum, the calculation must include such expenditures by the State for public highways. Expenditures would include projects wholly funded by the State plus the State's shares of all federally funded highway projects. At the State's option, the calculation can also include qualifying expenditures by toll authorities or local officials for public highways, or expenditures by the State or local authorities on transit systems within the State. For consistency, those types of expenditures included in the first MOE determination must be included in all subsequent MOE determinations.

In determining the 12-month period to use for the fiscal years in the MOE determination, similar to the credit determination, a State can use the 12-month period represented by the FFY or the 12-month period for the fiscal year(s) of the entities whose expenditures are included in the MOE. Whatever 12-month period(s) are used in the first MOE determination must continue to be used in later determinations.

Request and Approval of Credit

A State's request for approval of a credit shall identify the credit amount by FFY, indicate the MOE alternate (1, 2, or 3) being used, and provide a summary of expenditure amounts to support the MOE determination.

A State's request shall include a certification by the State that: (1) the credit and MOE determinations have been based on expenditures for improvements that met the above criteria; and (2) the State has on file adequate documentation to support the amounts included in these determinations. This documentation should be available for audit or inspection.

The State's request should be submitted to the FHWA State Division Office (Division Office). The Division Office should review the request for conformance with the credit provision requirements. Each DA will be responsible for reviewing and approving toll credit applications received from the State. The DA will reply directly to the State concerning acceptance of its toll credit application.

The State will be required to request toll credit amounts on a FFY basis and a specific MOE determination method as outlined in this memorandum. The Division Office will maintain a record of the State's requests along with a record of the cumulative use of toll credits applied toward the non-Federal share of eligible projects. The method of tracking toll credits earned and used must allow for an accurate accounting of the current balance of a State's available toll credits.

The Division Office will also be responsible for coordinating the use of toll credits with the Federal Transit Administration (FTA) and the National Highway Traffic Safety Administration (NHTSA). The Division Office will notify both FTA and NHTSA whenever toll credits are approved.

If a State decides to use MOE Alternate 2 or 3, expenditure data may not be available yet. In this case, the State's submission will not include a "certification" covering the MOE determination but instead will be a request to use either MOE Alternate 2 or 3. Since both of these alternates rely on determining actual expenditures at a future point in time, the MOE certification will subsequently be made by the State once the time period involved has transpired and the actual expenditures are known.

General Requirements

Credits earned may be applied toward the non-Federal matching share of programs authorized by title 23, U.S.C, except the credit may not be applied to projects funded with FHWA's emergency relief funds or ADHS program funds. Additionally, the credit may be applied to transit programs authorized by chapter 53 of title 49, U.S.C.

Use of the toll credit provision can begin with FFY 1992. As discussed above, certain MOE alternates were only available beginning with FFY 1995. Additionally, the flexibility concerning use of the two-year rule in determining the average expenditures for the MOE determination is only available beginning with the FFY 1998 credit determination.

The MOE determination only needs to be satisfied for the FFY for which a State earns the credit amount. Once a credit amount is appropriately established, it can be applied whether or not the State satisfies the MOE determination in later years. Additionally, any established credit does not lapse after a period of time but remains available until used by the State.

A request to use toll credits on a specific Federally funded project should be submitted to the appropriate Federal agency (FHWA, FTA, or NHTSA) administering the project.

Toll credits can be applied at any time during the development and implementation of the project, including after execution of the initial project agreement. A State has the option of using toll credit amounts to cover all or a portion of the non-Federal share of a project. The project agreement or modification should indicate what the Federal share is and that toll credits are being used in lieu of all or part of the required State match, resulting in up to 100 percent Federal funds being used on the project.

Where the toll credit is applied on a project, whatever Federal share is established at the time of project authorization must be used throughout the life of the project. Subsequent underruns, or overruns if a balance of unused credit is available, should be processed at the initially authorized Federal share.

The State must establish a special account to track appropriate toll credits. The State will place into the special account the amount of credit that the FHWA has approved. When the State requests authorization of a project using the toll credit, it shall request that all or a portion of the non-Federal share be credited from the special account. These projects will be processed and administered in accordance with normal procedures except that the amount of funds authorized on the project and the Federal participation will be increased. When the State submits a request to use credits from the special account, it will reduce the account by the amount applied to a project. The amount of non-Federal share credited will be deducted from the unobligated balance of Federal-aid funds available and charged to the State's obligation limitation.

The toll credits can be applied to projects retroactively, i.e., after project authorization. In general, a State may begin use of toll credits once a credit amount has been approved by the FHWA. However, it is acceptable on a Federal-aid project to conditionally authorize use of the toll credit provisions subject to a State providing appropriate credit and MOE certifications and their subsequent acceptance by the FHWA.

At any time, a State may request approval of a toll credit for the current FFY or any past FFY starting with FFY 1992.

Questions concerning this memorandum should be directed to Mr. Greg Wolf, of my staff, at 202-366-4655.